The arrow is on the string! The former Bank of Japan committee member: There is a high probability of a rate hike in June, and the risk of policy lag should not be ignored

Former Bank of Japan board member Makoto Sakurai said on Friday that the Bank of Japan is highly likely to raise its benchmark interest rate at the June meeting. This meeting will determine whether the authorities can avoid falling behind the situation in combating inflation. The arrow is on the string! Expectations for a rate hike in Japan in June are rising. Sakurai served as a Bank of Japan board member from 2016 to 2021. In an interview on Friday, he said: "They are very likely to raise the interest rate this time. If they don't, the policy will lag behind the situation. This meeting is crucial." Sakurai added that the interest rate meeting on June 15-16 is a key point for the Bank of Japan. He believes that if they miss the opportunity to raise interest rates this time, the Bank of Japan will eventually have to indefinitely postpone the next rate hike. The ongoing situation in Iran is creating a high degree of uncertainty, further complicating the policy adjustment. At the time Sakurai made the remarks, the exchange rate of the yen was approaching the level at which Japanese authorities intervened in the market last month, exacerbating the inflation pressure caused by rising import costs. Currently, traders believe that there is a 78% chance of the Bank of Japan raising interest rates on June 16. Data released earlier on Friday showed that the Consumer Price Index (CPI) in Tokyo, excluding fresh food, rose by 1.3% year-on-year in May, which was lower than economists' expectations and the smallest increase in four years. Government subsidies were the main factor contributing to the slowdown in inflation this time. Sakurai pointed out that the data in Tokyo is influenced by technical factors and will not change the direction of the Bank of Japan's policy, as core inflation may accelerate later this year. Sakurai said, "In the fall or later this year, the inflation rate may exceed 3%. At that time, will they be eager to raise interest rates three times in a year? Probably not." He added that a policy adjustment frequency of about twice a year is more appropriate. Bank of Japan steadily hikes rates Yen continues to weaken, with increased pressure to raise rates Japanese Prime Minister Sanae Takaichi is seen as a potential obstacle to a rate hike by the Bank of Japan, as she has always advocated for loose monetary policies. Last week, she hinted to Bank of Japan Governor Haruhiko Kuroda that in formulating the "correct" monetary policy, consideration should be given to government measures aimed at mitigating the impact of inflation, which is actually a subtle suggestion to keep interest rates unchanged. However, Sakurai said that given the statement of support for a rate hike by U.S. Treasury Secretary Scott Best during his visit to Tokyo earlier this month, Takaichi will probably not intervene in the Bank of Japan's policy adjustment this time. Bank of Japan officials have indicated that even if interest rates are raised, the financial environment will remain accommodative. Sakurai said, "Considering the Japan-U.S. diplomatic relationship, the Takaichi government may have to accept a rate hike." The yen is widely seen as another key factor in the Bank of Japan's interest rate decisions. By Friday afternoon, the yen against the dollar was at 159.34, close to the level the Japanese government intervened in April to support the yen. Sakurai said that if there is no rate hike in June, the yen will further weaken, a situation that would anger the United States. The Japanese Ministry of Finance is expected to release data later on Friday disclosing the scale of funds used for market interventions to stabilize the yen between April 28 and May 27. The data will not list the number of interventions or specific dates, but sources familiar with the matter confirmed that on April 30, authorities carried out a round of interventions in the foreign exchange market, with market speculation of multiple operations in the following days. It has been reported that Best has long criticized the Japanese government for supporting the yen through interventions in the foreign exchange market, advocating instead for the Bank of Japan to address yen depreciation through monetary policy measures such as rate hikes, rather than direct market interventions. Assessment of bond-buying program also in focus Another key point of the June meeting is the Bank of Japan's reassessment of its bond-buying program, as Japanese bond yields have risen significantly in recent times. The key question is whether the Bank of Japan will continue to reduce the monthly bond purchase size by 200 billion yen in each quarter of the fiscal year beginning in April 2027. At the current rate of reduction, the monthly purchase size will decrease to 2.1 trillion yen (approximately $132 billion) by March next year. Sakurai said that considering the recent volatility in the bond market and the progress the Bank of Japan has made in reducing its balance sheet, it may be possible to stop reducing the size of bond purchases next year and maintain the pace of 2.1 trillion yen. The Bank of Japan's balance sheet has been reduced by about 13% from its peak, currently standing at around 663 trillion yen. Sakurai said, "I can accept both choices, but I believe that there is no need to continue reducing the size of bond purchases at this point. However, raising interest rates is definitely the top priority now."